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Foreign Capital in Latin America: A Long-Run Structural Global VAR Perspective


Melisso Boschi


University of Rome 3; Centre for Applied Macroeconomic Analysis (CAMA)

October 2007

University of Essex Discussion Paper Series No. 647

Abstract:     
I study the determinants of capital flows to Argentina, Brazil, and Mexico, assessing the relative importance of domestic and global factors. I estimate six VECM models, one for each Latin American country plus the Euro Area, Japan, and USA, and then embed them in a multi-country Global VAR. The cointegrating space is identified in terms of theoretical long-run relations linking net foreign assets (NFA) to the other variables of the model. The results show that in the long-run external prevail on domestic factors as determinants of the equilibrium behaviour of NFA, with the relative importance of each factor varying from one country to another. Generalized Impulse Response Functions (GIRF) and Forecast Error Variance Decomposition (GFEVD) provide overwhelming evidence that domestic shocks are predominantly responsible for the short-run dynamics of Latin American NFA. Although all previous studies focus on North-American economic influence, one striking result of this paper is that the US variables are by no means the main external factors affecting Latin American NFA. Quite on the contrary, Japanese and, to a lesser extent, European cyclical conditions explain a large proportion of Latin American NFA short-run behaviour.

Number of Pages in PDF File: 65

Keywords: Net foreign assets, capital flows, real exchange rate, Latin America, Emerging markets, VECM, Global VAR

JEL Classification: F21, F32, C32, C50

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Date posted: December 27, 2007  

Suggested Citation

Boschi, Melisso, Foreign Capital in Latin America: A Long-Run Structural Global VAR Perspective (October 2007). University of Essex Discussion Paper Series No. 647. Available at SSRN: http://ssrn.com/abstract=1078469 or http://dx.doi.org/10.2139/ssrn.1078469

Contact Information

Melisso Boschi (Contact Author)
University of Rome 3 ( email )
Via G. Chiabrera, 199
Rome, 00145
Italy
HOME PAGE: http://sites.google.com/site/melissoboschi
Centre for Applied Macroeconomic Analysis (CAMA)
ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia
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